food and beverage 2012 ingredients for success in volatile...

Food and Beverage 2012Ingredients for success in volatile markets

29250 jc_FoodBeverage:jc 18/02/2009 12:08 Page AA

Foreword 1

Executive summary 2

Setting the scene 4

Changes in consumer behaviour 8

A perspective from industry leaders 9

Implications for businesses 12

Key questions for the industry 15

Ingredients for success in volatile markets 16

Our Food and Beverage specialists 20

Contents

29250 jc_FoodBeverage:jc 18/02/2009 12:08 Page AB

Foreword

Some 18 months ago we launched our report “An appetite for change: Eat, drink and be ready”which provided a unique insight into changingconsumer needs and preferences and examined theresulting challenges and opportunities facing the foodand beverage industry. The key themes included carbonfootprint and the environment, good nutrition andhealth, ethical sourcing and the continuing focus onfood safety.

None of these have gone away, yet so much has alsochanged in the wider economy and within the industry.This, our latest report describes the rapidly shiftinglandscape and identifies the issues and choices facingbusinesses looking to successfully navigate thedownturn and emerge as future industry leaders.

The Food and Beverage team at Deloitte hope you find this report insightful and useful and we lookforward to having the opportunity to discuss itsimplications for your business.

Lawrence HutterGlobal Managing PartnerConsumer Business

1Food and Beverage 2012 Ingredients for success in volatile markets

29250 jc_FoodBeverage:jc 18/02/2009 12:08 Page 1

2008 was a tumultuous year for businesses in the food and beveragesector. In the first part of the year food commodity prices soared,driving food price inflation sharply upwards.

Executive summary

The numbers of covers and average spend inrestaurants are falling, but at the same time, sales ofsome premium products in supermarkets are rising asconsumers treat themselves at home instead of goingout. People are still spending money, but their prioritiesare changing, with price and value increasingly centralto the choices they make about where to shop andwhat to buy.

In this more challenging environment, competition istough and pressure on margins accentuated. Food andbeverage businesses must think carefully about howthey engage with consumers and shoppers to securetheir share of available spend. Companies must considerthe different ways in which people obtain and use theinformation that informs the choices they make. Theinfluence of traditional ‘push’ media such as televisionadvertising is diminishing. The power of ‘pull’ mediasuch as the internet is growing fast and transformingthe relationship between business and consumer.

Crucial to this process is ensuring a strong link betweenthe stimuli consumers receive outside the store andwhat they are receptive to in store, particularly withpromotions being an increasingly important part of themarketing mix in both retail and hospitality. Closercollaboration for example between retailers andmanufacturers will be important. For manufacturers, thetraditional barriers between marketing and sales needto be broken down quickly in a more shopper and pointof consumption centric approach to demandstimulation and management.

Demand had outstripped supply for a number of yearsdriven by global population growth and increasingaffluence in the developing world. The removal of priceintervention in the US and EU had also made a majorcontribution to declining inventories of key commodities.2008 saw a tipping point. The market did the rest,fuelled by fears over security of supply and activespeculation in commodity futures.

By August 2008, food commodity prices had peakedand since then have been falling. A strong cerealsharvest in 2008 boosted grain stocks and the globaleconomic downturn helped soften demand for both oiland food. These falls are now flowing through into adramatic reduction in food price inflation and thebeginnings of real price reductions for the consumer,with the weakness of the pound limiting the extent ofreal price deflation for UK consumers.

Just as food price inflation began to ease, the creditcrunch started to impact economies around the worldwith the UK in the front-line. This has presentedbusinesses with a new set of challenges. Disposableincomes are being squeezed and consumer spending is in decline. Consumer confidence is at an all time low and even better off individuals are spending morecautiously. The number of companies failing is mountingand unemployment is rising rapidly.

The recession is not just impacting how much moneyconsumers spend but also the way in which they spendit. Footfall in discount grocers is rising and manyshoppers are trading down, for example from moreexpensive convenience foods to economy products andcheaper raw cooking ingredients.

2


The third area is about laying the foundations for futuresuccess in the medium term, for example in a 2012timeframe. This is about being clear about both “whereto play” and “how to win”. Businesses will need toconsider, among other things, re-evaluating strategiesrelating to channel, category and geography focus;integrating marketing and sales in more shopper centricapproaches; focusing innovation on changing customerand consumer needs; and developing longer termsourcing strategies to secure supply.

Finally, building confidence among stakeholders iscrucial. This includes motivating managers and staffduring the downturn; managing shareholder interactionsand expectations; and both reassuring and collaboratingclosely with suppliers and other business partners.

Ultimately, the companies and brands that do well inthe future will be those which track and anticipatechanging consumer needs and preferences andengineer the right value propositions for their customersand consumers. Most consumers will feel less well-offfor the foreseeable future and falling commodity pricesrisk contributing to a deflationary dynamic in theeconomy. Success will depend on being more granularand agile in understanding how the market is changingand targeting different consumer groups accordingly.

Many businesses will use this market to theiradvantage, anticipating and responding to consumerneeds, capturing share and being ready for the recoveryfitter, leaner and with healthier margins. In theconclusions to this research report, we share theingredients for such success.

Longer term challenges lie in waitAlthough the recession has helped dampen commodityprices for now, businesses must prepare themselves forongoing volatility in the markets. Food and oil priceswill almost certainly rise again in the future as theglobal economy recovers and the world’s populationcontinues to grow. Food and beverage businesses needto give careful thought to their sourcing strategies andrelationships with key suppliers.

Unsurprisingly, the combination of the recession andvolatile commodity markets has resulted in a sombremood among many of those operating in the food andbeverage sector. Research we conducted at the end of2008 demonstrates that the vast majority of companiesbelieve consumer confidence is worse than a year ago.They also think the economy will deteriorate furtherover the coming 12 months.

In facing up to today’s challenges, there is no “one sizefits all” recipe for survival, prosperity and future marketleadership for companies in the food and beverageindustry. That said, there are a number of areas thatbusinesses should think about when developingstrategies appropriate to their particular situation.

The first is strengthening the balance sheet, whichfocuses on sources of funding and cash managementto improve liquidity. The credit crunch means manybanks are reluctant to provide new lending or evenrenew existing facilities. As the economy has slowed,more and more businesses are challenged in servicingtheir debts and ensuring adequate working capital.Tackling this may, for example, require debtrestructuring, recapitalisation and new approaches tosupply chain finance and trade credit insurance.

The second area is optimising trading performance,which focuses on ‘how to win’ in the current market –maintaining and growing market share with reducedresources. Priorities include improving the effectiveness ofmarket spend; optimisation of pricing and promotions: a sharper focus on customer and product profitability;range simplification; and product value engineering.General housekeeping – such as back office cost-efficiency and managing the effective tax rate of thebusiness – has a role to play, too.

3Food and Beverage 2012 Ingredients for success in volatile markets


4

Setting the scene

To call the past year turbulent would be an understatement. A combination of economic factors has conspired to make life tough for those who manufacture food and drink, those who sell it and those who consume it.

In the first half of 2008 the value of key food commoditiesrose sharply, impacting businesses and individuals alike.Factory gate prices increased, the cost of food anddrink in stores and foodservice outlets followed suit,and consumers began to feel it in their pockets.

Later in the year commodity price pressures began toease but by then the financial meltdown that resultedfrom years of irresponsible lending had hit the financialmarkets and was spreading to the real economy.Consumers were bombarded with messages of doomand gloom. The credit crunch increased the cost ofborrowing dramatically, or rendered it virtuallyunavailable. House prices began to fall, adding to thegeneral sense of economic woe. It all amounted to a“perfect storm” in which the cost of food and otherproducts was rising, and consumer confidence andspending power were in sharp decline.

On a more positive note, inflationary pressures fromcommodity prices have now eased – the oil price hasfallen and food price inflation has gone into reverse fornow. However, the underlying factors which droveprices up in the first place have not gone away and aweaker pound, while good news for exporters, willimpact the cost of imported foods. The price of keycommodities, while much lower than the peaks seenpreviously, will most likely remain volatile and all againstthe backdrop of the economic downturn.

This has major implications for companies operating inthe grocery and foodservice sectors, presenting bothsupply-side and demand-side challenges. It meansbusinesses must respond to weakening consumerspending power and shifting consumption patternswhile at the same time paying close attention to costs.It will inevitably translate into tough price competitionbetween retailers and greater margin pressure onsuppliers, creating a challenging environment for foodand drink manufacturers.

Why has this happened?The cost of basic food commodities rose sharply becausedemand growth had exceeded supply growth for anumber of years and inventories of key commodities hadfallen progressively. Global demographics were largelyat the root of this.

Global population growth continues to increase demandfor food generally, with a net increase of 70 million“new mouths” to feed added each year worldwide.Meanwhile, the rapid emergence of a relatively affluentmiddle class in key developing economies such asChina, India and the Middle East has increased demandfor high value foods traditionally popular in the West.Analysis by the World Bank indicates that an increase indaily food expenditure from £1 a day to just £5 a day inthe developing world results in rapid growth in demandfor basic agricultural commodities as people eat moremeat and dairy products. Given that, for example, ittakes 8kg of grain to produce 1kg of beef, it’s easy tosee how increasing affluence in the developing worldcan result in enormous pressure on global supplies ofcereals.

Other socio-political factors have played a part, too. The removal of price intervention in the EuropeanUnion and in North America has ended phenomenasuch as the so-called “butter mountain”. This eradicatedincentives to over-produce, but has also left inventoriesat record lows. Five years ago, there were 18 months ofgrain buffer stocks in storage; by early 2008 there werejust a couple of months of stocks. The balance of powerin the market switched suddenly from buyers to sellersand a vicious upward price cycle ensued as retailers,manufacturers and even governments scrambled forsupply.

Furthermore, subsidies in some parts of the worlddesigned to encourage bio-fuels production havediverted precious agricultural capacity away from foodproduction. Climatic events have also adversely affectedsupply. Droughts in Australia, for example, have impactedgrain production severely. Another aggravating factorwas the spiralling cost of oil, something that impactsdirectly on all parts of the food supply chain from farmto fork, from the farmers heating their chicken sheds, and buying fertilisers to the distribution of food to thesupermarket.

With all these factors combined, the increase in foodmanufacturer input costs through 2008 averaged around20%. For food retailers, the equivalent figure wasaround 7%. Food price inflation for the UK consumerpeaked at around 14% before it started to fall back.


Food and Beverage 2012 Ingredients for success in volatile markets 5

The outlook for food prices Going forward, the short to medium term outlook is forlower but volatile food prices. The intense competitionbetween UK grocers will ensure that, as input costs formanufacturers fall, these are passed through to retailersand then on to the consumer. However, unlike theEurozone countries, where commodity price falls willmost likely translate into real food price deflation in2009, UK food prices will probably be prevented fromfalling further because of the relative weakness of thepound and the importance of imports in the overall mixof what we consume. In a way this will prove to be anadvantage to UK retailers over their continentalEuropean peers, who will need to manage the hugelychallenging cycle of deflation, followed by a return toinflation and all that means in terms of coping with theresulting shopper mind-set change.

The respite provided by falling commodity prices willalmost certainly be, at best, medium term. Firstly, theeffect of governments pumping huge amounts of liquidityinto the global financial system will inevitably be inflationaryonce the economy begins to show signs of recovery.Secondly, despite recent falls in the price of oil, the longterm forecast is for the cost of energy to rise again, most likely with repeated cycles of price spikes fuelled bythe futures markets. The International Energy Agencypredicts global demand for energy to increase by 50% by2030.

Thirdly, although the financial downturn is impactingeconomic growth now, and thereby weakening demandfor commodities, there is no long term prospect of anend to the growth in the middle class and rising incomesin developing economies. Finally, in spite of last year’sbigger harvest, future harvests will need to continue toimprove dramatically to meet growing demand forcereals. The FAO estimates that world food productionwill need to rise by 50% by 2030 and double by 2050to feed the world’s population, which will surge fromsix billion people now to nine billion over the next fourdecades.

Source: UN Food and Agriculture Organisation; US Energy Information Administration

* = average monthly

50J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

100

150

200

250

300

350

400

450

500

Indexed (01/2006=100)

2006 2007 2008

$1,200

$963

$294

$482

$1,519

$129

PeakPrice*

237%$620$262Fertilizer195%$591$303Rice

$103

$57

$733

$57

Jan 06

154%$158Maize

146%$247Wheat135%$991Oilseed

95%$54Oil

ChangeNov 08

Figure 1. Selected cereal/oil/fertiliser prices

Commodity prices have fallen dramatically since their peaks in mid 2008. According toestimates from the Food and Agriculture Organisation (FAO), the world cereal harvestrose to record levels last year, up 5.7% on 2007, boosting supplies.

This was thanks to favourable weather conditions and higher prices, whichencouraged increased planting. Softening demand for fuel and food during the globaleconomic crisis, particularly in the developing world, also contributed to easing thedemand/supply equation and puncturing the commodity price bubble that had beenexacerbated by speculation in futures markets.


In the short term the UK will probablyexperience a stagnant or slightlydeflationary food price environmentdepending on the strength of the pound.

A growing global population doesn’t just mean morepeople to feed. The ensuing greater demand for food,water and fuel will place added pressure on eco-systems, making it difficult to halt, or reverse globalwarming. The general consensus is that we are doingtoo little too late. This, will therefore result in theunpredictable weather patterns, from severe droughtsto catastrophic flooding, which can devastate harvests.The problems created by human-influenced climatechange are unlikely to be resolved, in spite ofgovernments’ best efforts, and this will put significantpressure on food supplies.

In addition, new challenges are emerging all the time.The decision by the European Parliament to ban22 pesticides deemed harmful to health is one example.Politicians and farmers in the UK have warned this will makesome crops more difficult and more expensive to grow.

The recent easing of pressures on commodity and foodprices is therefore temporary, though potentially with usfor the next two to three years. In the short term theUK will probably experience a stagnant or slightlydeflationary food price environment depending on thestrength of the pound. In the longer term, it is hard toavoid the conclusion that food price inflation will return.

Impact of the economic downturnFor now though, food and fuel price inflation is over.Nevertheless, any relief consumers might be feeling as a result will be far outweighed by the impact of thecurrent economic downturn on their personal financialcircumstances.

The ending of a global debt boom has ushered in a newera of debt reduction and falling asset prices around theworld. The industrialised world, including the UK, is inrecession and growth is likely to contract in virtually allWestern economies in 2009. Average forecasts are (attime of writing) for the UK economy to shrink by 2.1%over the course of the year, some predict as much as3% contraction in the overall economy.

It is likely that the economy will continue to contractinto 2010 and it is quite possible that this recession willbe more severe than those of the 90s, 80s or 70s. Given the deeply disrupted state of the financial sector a return to historical levels of average output growth isunlikely until 2011 or later.

The economic chill has left consumers suffering a nastybout of financial flu. House prices, one of the key factorsin the economic boom of recent years, have been infreefall, the market frozen up by the reluctance of banksto lend to potential buyers.

Personal debt levels are high, with household debt in theUK having risen from 20% of GDP in 1978 to 60% in1998 and almost 90% today. Consumers’ access to newcredit has been diminished, and many struggle even topay off existing loans. The savings ratio, at less than 1%, is at exceptionally low levels.

Like the banks, UK households need to rebuild theirbalance sheets. That means reducing debts andincreasing savings. But doing so in an environment ofdeclining real incomes, reduced credit availability, fallinghouse prices and raising unemployment will bechallenging and the process of rebalancing will takesome time. Consumer spending is likely to take much ofthe strain. ‘Big ticket’ spending, from homeimprovements to cars is coming under the greatestpressure.

Unemployment, meanwhile, has risen by over a quarterof a million from its trough and is likely to go substantiallyhigher. Some forecasters assume it will double over thenext two to three years, leaving millions hard up.

All these factors, together, equate to an environment in which spending by already indebted UK consumers is being affected by dramatic falls in confidence.Unsurprisingly, people are trying to save money byeating out less, trading down in what they buy andspending less on the high street. The average forecastercurrently expects that overall consumer spending willcontract by 1.8% in 2009.

The Government and the Bank of England have nothesitated to intervene. Reductions in interest rates andthe provision of capital to the banking system shouldmoderate the severity and duration of the downturn.Policymakers are likely to be willing to throw everything– including printing money – into the battle to prevent a protracted period of deflation. But the adjustment indebt levels and asset prices which is already underwayhas further to run. In a world of scarcer credit and lowerasset prices, consumers need to save more and spendless. This process of rebalancing will take time.

The main issue now concerns the scope and efficacy of monetary policy. Progressively more unorthodoxmonetary and fiscal measures should start to stabilisethe financial system in 2009. The pace at which thishappens will be key to determining the timing of thetrough in this cycle. But for now, the UK economy islikely to remain weak well into 2010.

6


Food and Beverage 2012 Ingredients for success in volatile markets

“Although the recessionhas helped dampencommodity prices fornow, businesses mustprepare themselves forongoing volatility in themarket.”

7


8

With consumers’ disposable income squeezed by the reducedavailability of cheap credit, and their desire to spend impacted byfalling confidence, it is not surprising that shopping habits arechanging.

This is manifested in different ways. Convenience,quality, health and nutrition, environmental and ethicalconcerns have not gone away. However, price andvalue are becoming increasingly central to the choicesthat shoppers make about where to shop and what tobuy.

There is evidence that people are making fewer butmore planned trips to the supermarket. More carefulshoppers are also shopping around for commodities inone store, and luxuries in another. Sales of private labelproducts are rising in several categories. Many arebuying fewer added value pre-prepared products andcooking more from scratch instead – which may alsoencourage healthier eating.

Retail data illustrates how people are altering the waythey buy food and drink to reflect the change in their financial situation and confidence in futureincome. TNS Worldpanel figures for the 12 weeks to 25 January 2009 showed Aldi’s sales up 24.1% year-on-year and Lidl’s rising by 11%. Freezer centres also didwell, with Iceland’s sales rising 14% and Farm Foods’14.9%. Of the ‘Big Four’, only Morrisons and Asdaenjoyed growth ahead of inflation, while premium-player Waitrose saw sales fall 0.2%.

There are also signs shoppers are ‘redefining need’when it comes to the kinds of products they buy. Asda has reported that while sales of flavoured waterthrough its stores are up 10%, sales of plain still water– which is also available from the tap – are down 15%. There are also signs of consumers going back to basicsto make grocery shopping more affordable. Retailershave found that their advertising of budget recipes forthe whole family has resonated with shoppers andgenerated substantial increases in sales of thoseproducts.

Paradoxically, retailers are reporting big increases insales of some luxury items – Champagne for example –giving weight to the traditional belief that in hard times,consumers stop going out to treat themselves and stay

Changes in consumer behaviour

in instead, particularly towards the end of the week.This observation is reinforced by businesses in the upperand mid-casual dining sector, where the number ofcovers have fallen dramatically, in many locations, some citing a 30% reduction. Alongside this, manyrestaurant operators are seeing average spend per cover also falling.

Where consumers are eating out, there is evidencemany are trading down, with operators at the lowerend of the market reporting buoyant sales. Recently,McDonald’s said record numbers of people were diningin its UK restaurants, partly as a result of consumerstrading down from more expensive options to cheaperburgers and fries. Domino’s Pizzas, meanwhile, recentlyreported sales up 8.6%. The average order placed withthe takeaway chain is just £14.50. Circumstances aredictating that consumers must cut back, and they are.But they are doing so with care whilst ensuring they arestill able to enjoy the food and drink they want. Against this background, we are seeing the emergenceof a stronger competitive pricing dynamic in thehospitality sector that will see margins coming undergreater pressure.

In this environment, it is also not surprising that we areseeing a decline in the relative priorities given byconsumers to issues such as health, ethical sourcing andthe environment, even though food still represents a relatively small percentage of the outgoings of betteroff individuals and families. We have seen a fall in salesof organic foods, for example, though sales of ethicalbrands such as ‘Fairtrade’ have held up better. However, these factors will not go away altogether. For one thing, pressure from the Government throughboth legislation and high profile voluntary programmesis unlikely to disappear just because of the economiccrisis. Public health and the environment are key areasof government policy and will continue to shape thepolitical agenda. Nor will public pressure onmanufacturers and retailers to behave more responsiblyin terms of, for example, animal welfare go away, drivenby pressure groups, the media and celebrity chefs.



Most companies operating in the UK food and beverage sector aregenerally downbeat about the current business climate and about thechallenges that 2009 holds in store, though some still see opportunity.

A perspective from industryleaders

Figure 2. Which of the following will be your main priorityover the next 12 months?

Cost reduction 31

19

13

12

12

8

0% 10%

Source: Deloitte industry survey

20% 30% 40% 50%

Improved targetingof marketing/

trade marketing

Security of supply

New productdevelopment/

innovation

Pricing strategy

No plannedchange to strategy

This view is revealed in a survey we conducted of seniorexecutives from across the food and beverage industry.The findings are not surprising. Ninety six per cent ofrespondents said they thought consumer confidencewas worse now than a year earlier. Not a single respondentbelieved it was better. Meanwhile, 94% said theythought the health of the UK economy would deteriorateover the coming 12 months. None held the view thatthings would improve. Nearly half (48%) said theythought the performance of their own sector wouldworsen during 2009, while 38% said it would stay theysame.

Foodservice businesses had a particularly negative takeon things, with all respondents in the sector statingthey believed they would suffer in the coming year.Food and beverage manufacturers, however, wereslightly more optimistic. While 38% of respondentsfrom this group believed the prognosis was for theirsector to deteriorate in 2009, 54% thought sectorperformance would stay the same and 8% evenbelieved it would improve.

The survey responses indicated generally that mostbusinesses will be focusing on cost and price relatedfactors over the coming year as they face up to thechallenges of the economic downturn and changingconsumer purchase behaviour. Cost reduction will bethe top priority for 31% of businesses in 2009, withanother 12% identifying their pricing strategy as theirnumber one area of focus to protect and improvetrading performance.

It is not really surprising that so many are preoccupiedwith cutting costs when you consider that 73% ofrespondents said they had experienced substantial inputcost rises during the previous 12 months. A quarter hadfaced increases of between 11% and 25%. Tellingly,only 8% of respondents said they had implementedprice increases to match this rise, with 56% putting uptheir own prices by 10% or less.

Figure 3. By what percentage have your input costsincreased over the past 12 months? Have you increased theprice of your products over the past 12 months?

<5%33

13

2542

88

86

24

20

1917

0% 10%


Input cost increase Increased product cost

20% 30% 40% 50%

6-10%

11-25%

26+

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Input costs havecome down

Don’t know


10

The Economy 27

21

19

19

0% 10%


20% 30% 40% 50%

Changingconsumer demand

patterns

Security of food supply

Commodity prices

Figure 6. Which will be the most important big issue that willaffect UK food and beverage sector in the next 5-10 years?

This illustrates the gap that exists between the inputcost increases companies have faced and the extent towhich they have been able to recover these. In fact, just 37% of respondents were able to pass on all costincreases to their customers. With a range of inputcosts now falling, many suppliers and manufacturers arenow seeing their retail and food service customers seekprice reductions, though we are also seeing leadingretailers becoming increasingly concerned about thestability of their supply base in the current environment.

Reducing administration and overhead costs was themost common single area of focus for companieslooking to cut costs – cited by 37% of respondents. But product value engineering, cited by 21%, wasalso expected to be increasingly important over thecoming year.

The increased emphasis on price and cost has resultedin a decline in the significance of other factors whichhave become commonplace features of the food andbeverage landscape in recent years. Not one singleexecutive said that corporate responsibility, ethicalsourcing or reduction of carbon footprint would betheir top priority in 2009.

Conversely, the recent price spike in commodities andassociated availability issues have pushed sourcingstrategies higher up the agenda. Commodity prices andsecurity of supply were ranked equally as the singlemost important future issue that would affect the UK’sfood and beverage sector in the next five to ten yearsby 19% of respondents, or 38% combined. Security ofsourcing is, currently the number one current priorityfor 2009 for just 13% of businesses that participated inour survey. But we can be fairly confident this figure willrise as we move into the next decade and supply againbecomes constrained versus growth in demand.

Figure 4. Have you managed to pass all cost increasesincurred through to customers as price increases?

Have not managedto pass all through 6

31

37

6

0% 10%


20% 30% 40% 50%

Have managed to pass some through

Have managed to pass all through

Have managed to increase prices

more than cost andimprove my margins

Figure 5. What activities have been implemented to reducecosts?

Reducing admin/overhead costs 37

21

10

10

15

0% 10%


20% 30% 40% 50%

Product valueengineering

Delaying major projects

New sourcing approach

Other



In terms of relations with their suppliers, respondentsindicated a return to core fundamentals with 68% ofthose polled stating that price, quality and availability –either one of these, two or all three – would be themost important aspects of their relationship with majorsuppliers in 2009.

With consumers feeling the pinch, many businesses arefinding that purchasing behaviour is changing. Amongthose surveyed, 25% said the profile of their targetconsumer was changing, while the same proportionsaid their customers were trading down. It was alsonoted by 55% of respondents that promotionalintensity in retail outlets was increasing.

Many businesses see refocusing their marketingstrategies towards changing consumer and shopperneeds as a key strategy to ride out the recession andemerge stronger. Improved targeting of marketing andtrade marketing was considered the top priority for thecoming year by 19% of respondents. And only 4% saidthey would reduce overall marketing spend to cut costs.

In addition, most of those asked (83%) also said theyexpected to change how they communicated theirbrand proposition to their target audience either byputting a greater emphasis on brand differentiation andvalue or by working more closely with retailers oncommunicating with the shopper in store, or acombination of the two.

Interestingly, innovation – other than product valueengineering – was cited by no respondents as a priorityfor the coming year, suggesting companies will befocusing on getting the basics right in demand/supplymanagement and cost-efficiency before investing innew product development.

As a report card on the state of the food and beverageindustry, now and in the short to medium term, the survey findings do not make happy reading. Most companies are predicting tough times ahead or at least a period of no growth, against a backdrop of what nearly all respondents believe will be adeteriorating UK economy. The mood is sombre and theoutlook, at best, mixed. However, there are stillopportunities for those organisations that effectivelytrack and foresee changing consumer needs to meetthose needs with relevant brands, products and services.

Figure 7. What will be your main priority for the next 12 months?

Cost reduction 31

19

13

12

Improved targetedmarketing/trade

marketing

Security of supply

New productdevelopment/

innovation

12

8

5

0% 10% 20% 30% 40% 50%

Pricing strategy

No planned changeto strategy

Don’t know/other



12

On the whole, the food and beverage sector usually enjoys a degree ofinsulation during recessions since people continue to eat and drink,and this appears to be the case this time round.

Foodservice companies have experienced the sameinput cost pressures as retailers. But they also face theadded pressure that, with consumers eating out less inthe economic downturn and price competitionsharpening it is often harder for them to pass theseprice increases at point of sale. This has resulted in asharp focus on outlet performance and changes inmenu choice to reflect greater price sensitivity.

With the credit crunch exacerbating the impact of risingliving costs on consumers, food and beverage businessesare having to be especially focused on how best tocapture what money is still being spent. This means ithas never been so important to track and understandchanging consumer and shopper preferences and needsand to communicate effectively, both outside the pointof purchase and consumption and in the outlet itself.However, never before has it been so difficult to do so.

In the grocery sector, perhaps the most significantdecision consumers make is to visit a particular store atall. Previously this choice may have been made solely onthe basis of convenience of location or habit. But value,price and, in particular, information about promotionsare now becoming more important in many markets.Retailers are looking ever more carefully at how theyreach their target market and entice the shoppers theywant into their stores.

This is no longer simply a case of investing inconventional advertising. Consumers now use a varietyof different sources, such as the internet, digitaltelevision, mobile phones, celebrities and their personalnetwork to help them make choices about where toshop and what to buy. In particular there has been adecline in the influence of ‘push’ media, such astraditional television, radio and print, over whosecontent the public has little control. On the other hand,‘pull’ media, such as the internet and on-demand cableand satellite channels and social networking sites havegrown in stature as consumers take control over whatthey watch, when and how.

Implications for businesses

The impact of the economic turmoil has been mostkeenly felt in the non-food retail sector with manyhaving a torrid time and a number failing to survive thetwin burdens of declining business and unsupportablelevels of debt. The Christmas period, the mostimportant trading event in the retail calendar, wasdisappointing for many retailers. In a year that will beremembered in particular for the collapse ofWoolworths alongside many other famous names,consumers played a game of ‘chicken’, delaying theirChristmas shopping in the hope retailers would flinchfirst and slash prices. Many did, and the deepdiscounting continued until long after Christmas.

However, the food and beverage sector is notcompletely immune from the impact of the downturn.TNS Worldpanel data put total UK grocery sectorgrowth at 6.4% in the 12 weeks to 25 January 2009.This meant it was in much better health than the non-grocery sector. But over the same period food and drinkprice inflation was 8.3%, based on TNS’s own survey of75,000 products in-store, which meant grocery saleswere still in decline in real terms.

As the inflation figures suggest, the grocers have beenpassing on a significant part of their cost increases toconsumers. The impact of these increases on theconsumer has been mitigated by the intensecompetition between the UK’s leading grocery retailers,which has helped to dampen food price rises. This hashad a major impact on suppliers, with retailers askingthem to absorb at least some of the price increases. It has made life especially tough for many food andbeverage manufacturers, particularly those marketingsecond and third tier brands, as well as some of thoseoperating in the own label arena. As commodity priceshave fallen from their peaks, leading retailers have alsosought early price reductions from their suppliers tosupport competitive pricing for the consumer.

12



Even viewing of traditional television is beingtransformed by time-shifted recording such as Sky+,which allows viewers to fast forward throughadvertising breaks. Businesses must grapple with thischanging dynamic to ensure they don’t lose touch withtheir shoppers and consumers, especially with theeconomic downturn making those consumers evenmore price and value conscious than before.

The linkage between communication strategies outsidethe store with activation in the store is ever more crucial. In retail, research shows that shoppers, by and large,“sleepwalk” through a store paying little attention toinformation that could inform the product choices theymake. New labelling schemes have sprung up in recentyears providing details of products’ nutritionalcomposition, their provenance, carbon footprint, andmore besides. However, in the modern grocery market,while consumers increasingly expect more and moreinformation about products to be available, the reality isthat outside of specific dietary and related needs time-pressed shoppers make very limited use of writteninformation to inform product selection, being stronglyinfluenced by simple visual triggers.

It is vital therefore for brand owners, retailers andfoodservice companies to implement effective strategiesto connect with consumers and shoppers to differentiatetheir brands and create drivers for purchase in the faceof changing consumer behaviour. Retailers are becomingincreasingly aware of the need for integration ofmessaging outside the store and in the store. But intoday’s increasingly outlet and shopper-centricmarketing environment, branded manufacturers alsoneed to break down the barriers between marketingand sales, combining consumer and shopper insight toprovide a strong integrated value proposition to theretailer, restaurant operator and individual. Collaborationwith channel partners will be increasingly central tobranded manufacturers’ brand development andcommunication strategies.

Food safety, and its importance to brand reputation,should not be forgotten. In the past high food priceshave provided a financial incentive for less ethicalintermediaries to allow food not fit for humanconsumption to re-enter the food chain.

The big rises in the cost of commodities have takenfood safety off the front pages for a while, but not offthe agendas of senior executives in the industry whoappreciate the risks only too well. In the 2008 CIES Topof Mind survey of food retailers and manufacturers,food safety rose from number eight to number two in aranking of senior executives’ priorities and has maintainedthat position in the newly released 2009 survey.With ever more global patterns of food supply, itremains critically important for businesses to ensure theend-to-end integrity of the supply chain in which theyoperate in the interest of protecting consumers andprotecting the brands they trust. We should not becomplacement. This issue deserves even greater focuswithin most food and beverage businesses.

Ultimately, the successful brands in the future will bethose which track and anticipate changing consumerneeds and preferences and engineer the right valuesinto their proposition, recognising that not all consumersare alike. Success will depend on being more granularin understanding how the market is changing and intargeting different consumer groups accordingly. This will have to be done against a backdrop ofsignificant challenges as most consumers will feel lesswell-off for the foreseeable future.

Health and wellness will continue to be important butwill need to be affordable. Effective management offood safety risk is crucial. Environmental and ethicalissues will be essential to brand relevance but pricepremiums versus alternative products will need to bewell justified.

There will of course remain a significant minority ofaffluent consumers who can absorb the increases intheir costs and who will continue to shop much as theydid before, buying premium products, such as organicand Fairtrade. These shoppers should not be ignored asthey offer higher margin opportunities for bothmanufacturers, retailers and foodservice operators. At the same time, however, it would be unwise toignore how the centre of gravity of the market is shifting.


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“Many businesses seerefocusing theirmarketing strategiestowards changingconsumer and shopperneeds as a key strategyto ride out the recessionand emerge stronger.”



Success in today’s more challenging market environment will dependon understanding and anticipating changing consumer needs andresponding with relevant products and solutions at the right pricepoints.

The key questions for food and beveragebusinesses include:

• How are shopper and consumer needs changing,both in the short and longer term?

• Are our historical market segmentation models stillrelevant or do we need to find different ways oflooking at the market and the changing landscape of available revenue and value capture?

• What do we need to do to protect and enhance ourbrand’s reputation and ensure its relevance toconsumers whose mindsets are very different to a year ago and in which extravagance seemsinappropriate, even to the better-off?

• What is the most effective way of communicating ourbrand value proposition given the fragmentation ofmedia channels and the barrage of messaging thatconsumers and shoppers receive?

• How can we most effectively integrate messagingoutside the store with that at the point of purchase?

• How can we keep our existing customers andconsumers loyal, and win new ones?

• How can we stay ahead of the curve in anticipatingtheir needs and accelerate innovation and time tomarket?

• How should we steer the focus of this innovation torespond to changing consumer needs for value andkeen prices?

• What do we need to do to adapt our business modelto establish the capabilities needed to competeeffectively in today’s market?

• Where do opportunities exist to improve operationalefficiency and reduce costs, for example in marketing,sales, customer service, distribution or manufacturing,or the back office?

• How should we adapt our sourcing strategies foraffordability, sustainability and security of supply?

• How can we most effectively manage and reducefood safety risks given the new issues in the changedeconomy and increasingly global supply chain?

Key questions for the industry


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Winning in the medium term: which focuses on re-assessing strategy as to ‘where to play’ and ‘how towin’, for example in optimising the category andgeography portfolio; integrating marketing and sales inmore shopper-centric approaches; re-evaluating channelstrategies; focusing product innovation on changingcustomer and consumer needs; developing longer termsourcing strategies to secure supply; and ensuringintegrity in increasingly global supply chains.

Building confidence among stakeholders: whichfocuses on leading and motivating people in adownturn; managing shareholder interactions andexpectations; and collaborating with suppliers and otherbusiness partners.

Each of these is explained in more detail below.

In answering these questions, to claim that there is a ‘one size fits all’recipe for survival, prosperity and future market leadership for allbusinesses in the industry would be to over-simplify. Differentbusinesses find themselves with differing priorities.

For many mid-sized and smaller suppliers, especiallythose carrying significant debt as do many privateequity owned businesses, cash-flow and liquidity arethe critical issues, alongside pressure on prices andmargins and the need to reduce costs.

Larger, better capitalised businesses are often morefocused on tracking and anticipating changes in themarket by category, geography and channel andprioritising investment accordingly to meet changingconsumer and shopper needs.

That said, we can identify a number of areas that allbusinesses should think about when developingstrategies appropriate to their particular situation. These fall under the following broad headings of:

Strengthening the balance sheet: which focuses onsources of funding, working capital and cashmanagement.

Optimising trading performance: which focuses on‘how to win’ in the current market – maintaining/growing market share with reduced resources. Priorities include reducing complexity in sales andmarketing and improving the effectiveness of marketingspend; optimising pricing and promotions;understanding and improving customer and productprofitability; SKU range simplification; product valueengineering; short term sourcing optimisation;improving operational efficiency across the supplychain; providing outstanding customer service; andmanaging the effective tax rate of the business.

Ingredients for success in volatilemarkets


Pdt A (Region a)

Pdt A (Region b)

Pdt A (Region c)

Pdt A (Region d)

Pdt A (Region e)

Top x account forx% of positivecontributions

Accounts for y% of negative contributions

€300mContributors Destructors

Tota

l pos

itiv

e co

ntri

buti

ons

Net

con

trib

utio

n

Figure 7. Ebit contribution by product group and region, 2006€m

€200m

Pdt A (Region c)Pdt C (Region b)

Pdt B (Region d)Pdt B (Region c)Pdt A (Region d)

Pdt A (Region r)Pdt B (Region a)

Pdt C (Region a)Pdt C (Region b)

Source: Results of typical client portfolio analysis


Strengthening the balance sheetLiquidity is the biggest problem facing many businessestoday. Banks are reluctant to provide new lending oreven renew existing facilities. Retailers are bolsteringtheir own cash flow by insisting on extended paymentterms from suppliers. Many suppliers carry high levels of long term debt, especially those in private equityownership and those that have been engaged insubstantial acquisition activity at or near the top of themarket. As the economy has slowed, more and morebusinesses are challenged in servicing their debts andensuring adequacy of working capital. Leading retailersand foodservice companies are increasingly concernedabout the stability of their supply base.

Being more disciplined in managing receivables, payablesand working capital tied up in inventory is good practice,but hardly sufficient to make much impact on the scaleof the problem many face. More drastic action is requiredand businesses need to work with their lenders todevelop workable solutions. New equity investment canreduce short term debt but can adversely impact existinginvestors. Selling off non-strategic business units may benecessary, though values realised in today’s market maybe low. New approaches to supply chain finance whichsee invoices settled on presentation at an affordablediscount rate may be one of the most effective parts ofthe overall solution given that many businesses have 60 to 90 days of revenue tied in receivables.

Optimising trading performanceThere are a number of levers that businesses can and, inmany cases, are already pulling which can materially impactbusiness performance in the short-term. Speed, focus andcutting complexity are key themes. It’s often as much aboutdeciding what to stop doing because it is not value addingas it is about what to do that is new or different.

Marketing spend effectiveness is a critical lever for anybrand based business. Even before the current economiccircumstances, changing media trends and consumerbehaviours were already driving consumer goodscompanies to re-evaluate their marketing approach andmedia mix. Now, changing shopper behaviours andbuying patterns are also challenging the allocation ofmarketing investment across brands and channels. It hasnever been more important for consumer goodscompanies to spend their marketing money wisely.

Pricing and promotions offers one of the mostimportant areas of opportunity. Deloitte research showsclearly that getting price setting correct and instillingthe right disciplines in pricing execution has the highestpotential of any area of focus to positively impact boththe top line and profitability. In spite of brutal price-ledcompetition putting pressure on prices and margins

across the industry, many businesses could do more inwinning and sustaining the price increases they need.

Promotions are important and promotional intensity isset to increase in the current economic environment.What’s clear is that while shoppers like every day lowprices, they are even more influenced by promotions.The winners in maximising return on this investment willbe those that go beyond promotions simply being a‘ticket to play’.

They will capture the learnings from each promotionand apply them to future investment activity in a waythat adds value and reinforces the case for closercollaboration. Using shopper insight down to the levelof the individual will become increasingly central tostrategies to target promotional spend on the rightconsumers. The challenge for many will be how toreconcile the short term imperative to play to theconsumer’s appetite for promotions with the longerterm need to protect brand values and avoidcommoditisation.

In times of plenty many businesses could afford not tofocus on the profitability of individual customers andproducts, especially very strong brand-led businesses.However, times have changed and understanding wherevalue is created and value is destroyed has becomecritical to more and more businesses. Realistic customercost-to-serve models are becoming an importantbusiness intelligence tool but are still only established ina minority of businesses. Those businesses that havethem have an important commercial advantage, both inmargin management and price negotiation.


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Understanding product profitability provides a vitalstarting point for SKU range simplification and theelimination of business complexity that is a major driverof cost. It also focuses effort in product valueengineering which is increasingly important inprotecting margins. Short term sourcing optimisation,for example, capturing fully the benefits of recentcommodity price falls, is an important part of this.Procured materials often represent two thirds of thecost of manufactured foods at the factory gate andtherefore represent a key area of focus.

Improving operational efficiency across the supply chainis also important. If not already in place, this typicallyincludes establishing an effective sales and operationsplanning process, optimising the supply network andestablishing the right distribution partnerships. This isalso an important foundation for providing outstandingcustomer service from supplier to retailer, increasinglycentral to the ability to access wider joint businessdevelopment opportunities.

There are also housekeeping matters that, if not alreadyaddressed, should at least be considered as a part ofoptimising overall business performance. Manyorganisations have already addressed cost-efficiency inthe back office through consolidation and outsourcing.Most commercial organisations have a duty to releasethe potential value to their shareholders that thisaffords. However, clear business partnering models andservice level management frameworks need to be inplace to assure quality and value for money from sucharrangements. Managing the effective tax rate of thebusiness also presents opportunities to protect cash andincrease the capacity to invest.

Winning in the medium termIn parallel with pulling the levers that can help protectmargins and deliver strong business performance in theshort term, the businesses that are going to be theleaders in 2012 need to be laying the foundations forfuture success now. This is about being clear aboutboth ‘where to play’ and ‘how to win’.

With economic confidence declining and individualconsumption patterns rapidly changing the marketlandscape, traditional market segmentation and valuequantification models risk irrelevance. At the same time,the resources available for investment by businesses areincreasingly constrained.

To make the difficult decisions and trade-offs that willlay the foundations for future success, managementrequire solid quantitative evidence of value creationpotential. Deciding ‘where to play’ and gainingstakeholder commitment therefore requires robustinsights into how available market revenue and valuepools are evolving. These insights require high quality,timely analysis of past, current and anticipated markettrends to inform where the business should focus – onwhich consumer segments, in which geographies andchannels, in which types of outlet, and with whatproducts. They also require both an ‘outside-in’ view ofthe opportunities based on the changing marketlandscape and an ‘inside-out’ view that informs theability to exploit those market opportunities profitability.The result is both a clear view of ‘where to play’ and anagenda for the changes in the business required to playsuccessfully and profitably. Longer term, businessesshould make granularity of analysis a core discipline tounderpin strategic thinking and embed revenue andprofit pool landscape tracking in routine managementprocesses.

Based on clear priorities about ‘where to play’, manybusinesses will choose to make changes in theircategory and geography portfolio. Non-core businessesmay be divested. Attractively valued assets that fit thestrategy may be acquired, benefiting from the challengesthat many other businesses face in today’s market.Many businesses will find that brand architectures andstrategies will need to be refreshed to ensure relevanceand resonance in each priority market.

Outside-inanalysis

Market valuecapture

opportunities

Inside-outanalysis

Value creationand value

destruction inthe current

business

Prioritisedopportunities

Businessperformanceimprovement

areas

Targetoperatingmodel andcapabilities

required

Strategicplanningprocess

Synthesis of analysis

streams

Figure 8. Outside-in and inside-out analysis to identify value capture opportunities

Source: Deloitte “Where to play”analysis



We will see major changes in the way in which businessesreach the consumer and shopper. With fragmentingmedia, where individuals actively choose to pull contentrather than being passively broadcast to, and the growingpower and marketing capabilities of the retailer, traditionalbrand and product marketing approaches are fast beingabandoned in favour of more shopper centric approaches.Success in reaching the future consumer and visitor willdepend on integrating much more tightly activity outsidethe store with that inside the store. This in turn will meanbreaking down the traditional barriers between marketingand sales and, for example, integrating current andactionable shopper and consumer insight to inform brand,channel and communication strategies. Effectiveexecution then requires a strong marketing mix model; aneffective digital media strategy; good managementinformation on the allocation of marketing resources;excellent marketing sourcing processes; and realmanagement commitment to the alignment of marketingand sales activities. In the 2009 CIES Top of Mind surveyof food retailers and manufacturers, consumer marketinghas risen three places to number eight in a ranking ofsenior executives’ priorities showing that this is becomingmore important, even to smaller businesses.

Focusing product innovation and portfolio managementon changing customer and consumer needs will be alsobe crucial to longer term success in the industry. In spiteof economic challenge, the key trends we saw 18 months ago such as convenience, good nutritionand health, packaging reduction, interest in provenance,environmental impact and ethical sourcing have notgone away. At the same time affordability, perceivedvalue and price will be relatively more important driversof consumer and shopper choice for the foreseeablefuture than has been the case historically. Thosebusinesses that succeed in bringing new products tomarket that reconcile these different needs, and at thesame time make a good margin, will win market shareand capture value.

Moving to the supply side, the commodity price spikewe experienced in 2008 was a wake up call for manybusinesses, highlighting what occurs when demand andsupply come into finer balance. While we are now in amore benign period of commodity pricing from abuyer’s perspective, underlying trends such as populationgrowth, development of the middle class in majordeveloping economies and climate change are unlikelyto go away. As the global economy eventually movesout of recession and demand for commodities andresources accelerates, we will again see supply sidechallenges emerge.

The coming year will therefore be a good time for manybusinesses to revisit longer term sourcing strategies tosecure supply at the right quality and cost. We expectmore and more businesses to identify needs for greatervertical integration to secure supply and to assesspotential partners and suppliers according to criteriasuch as sustainability of supply; risk profile and climaticexposure; and long term capacity. We also expectstrategies for water and energy use to becomeincreasingly central to supplier choice.

Building confidence among stakeholdersPerhaps one of the most important things forbusinesses to do in the current downturn is to build andkeep the confidence of their various stakeholders – theirshareholders, their customers, their suppliers, theiremployees and others. Management need to focus onleading and motivating the people in the businessthrough the downturn – setting a clear direction,managing expectations and communicating regularly.The requirements are very similar to those needed todeal with shareholders; explaining strategy, managingexpectations and avoiding surprises. It’s equallyimportant to keep the confidence of both suppliers andcustomers – ensuring they see the business as a stableand reliable business partner, able and willing to workwith them in navigating a changing and challengingmarket. This sounds obvious – and it is to most – butwith so many demands on the time of business leadersit is worth a reminder.

In conclusion, we are entering a time of new challengebut also of new opportunity. The winners will be thosebusinesses that tackle the issues of liquidity and currenttrading performance without delay. This will allow earlyfocus on understanding and exploiting the longer termshifts in the market, enabling businesses to captureshare while getting leaner and fitter as a platform forfuture leadership and value creation. For mostbusinesses this means there is a huge amount to doand many will need expert support to make thenumerous changes needed, as sure-footedly and quicklyas business imperatives dictate.


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Deloitte is unique in our focus on the food and beverage industry andthe breadth of capability we bring to bear to help businesses navigatethe recession and emerge stronger. Please contact any of the our Foodand Beverage team to discuss your needs on the issues discussed inthis report or any other issues you may face.

Our food and beverage specialists

Contacts

AuthorsLawrence Hutter, UK Strategy Partner and Global ConsumerBusiness Managing Partner020 7303 [email protected]

Ian Stewart, Economist & Director, Deloitte Research020 7007 [email protected]

Audit Andy Morris, Enterprise Risk Services Partner020 7007 [email protected]

John Adam, Audit Partner020 7007 [email protected]

ConsultingNigel Wixcey, Consumer Packaged Goods Lead Partner020 7303 [email protected]

Allan Gasson, Consumer Business Strategy Partner020 7007 [email protected]

Corporate FinanceRichard Lloyd-Owen, Consumer Business Lead Partner020 7007 [email protected]

Conor Cahill, Transaction Services Partner020 7007 [email protected]

TaxJoanne Bentley, Corporate Tax Partner020 7007 [email protected]

Darren Stephens, Indirect Tax Partner0121 695 [email protected]

Regional ContactsJane Whitlock, Lead Partner – Birmingham0121 695 [email protected]

Mark Hill, Lead Partner – Bristol0117 984 [email protected]

Richard Crane, Lead Partner – Cambridge01223 [email protected]

Tarlok Teji, Lead Partner – Leeds0113 292 [email protected]

Sharon Fraser, Lead Partner – Manchester0161 455 [email protected]

Jim Boyle, Lead Partner – Scotland0141 304 [email protected]


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Deloitte LLP is the United Kingdom member firm of DTT.

This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of theprinciples set out will depend upon the particular circumstances involved and we recommend that you obtain professional advicebefore acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readerson how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care orliability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

© 2009 Deloitte LLP. All rights reserved.

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